Thursday, April 14, 2011

Debunking the Mercantilist Trade Doctrine

The general public, politicians, the media, and even some economists have bought into a false mercantilist doctrine that: a) exports are good for the economy and b) imports are bad for the economy, which therefore implies that: c) trade deficits are bad for the economy and d) trade surpluses are good for the economy. In a recent paper from the Cato Institute titled "The Trade-Balance Creed: Debunking the Belief that Imports and Trade Deficits Are a 'Drag on Growth,'" Daniel Griswold debunks that "consensus creed," here's a key excerpt:"What the past 30 years show is that the U.S. economy exhibits no sign of suffering during periods when the trade deficit is expanding. To the contrary, the U.S. economy grew more than three times faster during periods when the trade deficit was expanding as a share of GDP compared to those in which it was shrinking (see chart above, click to enlarge):1. Stocks, as represented by the Standard and Poor’s 500 Index, climbed an annualized average of 11 percent during periods when the trade deficit was “worsening,” compared to a less than 1 percent annual advance during periods when the deficit is “improving.”

2. Despite worries about the impact of the trade deficit on the U.S. industrial base, manufacturing output expanded a robust 5.2 percent a year during periods of rising deficits, in contrast to a 2.0 percent decline when the deficit was contracting.
3. Trade deficits are routinely blamed for job losses, yet civilian employment grew a healthy 1.4 percent annually during periods of rising trade deficits while job growth was virtually zero during those periods when the deficit was declining. Ditto for the unemployment rate. The jobless rate ticked down 0.4 percentage points per year on average when the trade deficit was on an upward trend, and jumped a painful 1.0 point per year when the trade deficit was shrinking. In four of the five periods in which imports did outpace exports, the unemployment rate fell, and in every period in which imports grew more slowly than exports, or fell more rapidly, the unemployment rate rose.

4. Although the creed would imply that declining deficits should accompany economic expansions, they are invariably linked with recessions. In fact, all three of the periods of declining trade deficits include the three most recent recessions. The Great Recession of 2008–09 coincided with the sharpest “improvement” in the trade deficit in the past 30 years. That is small comfort to the eight million Americans who lost their jobs during the recent downturn.

Here's Dan's conclusion: "The time to reform the prevailing doctrine of the trade balance is long overdue. The goal of U.S. trade policy should not be to maximize exports and minimize imports in a misbegotten quest for “balanced trade.” The goal should be to maximize the freedom of Americans to buy and sell in global markets for mutual gain, whatever the mix of goods, services, and assets we freely choose to trade."

11 Comments:

No politician ever gained power by not interfering, and no special interest ever sponged off the rest of society by competing on the free market. That's all the analysis you need to understand mercantilism.

I usually agree with you. But this is a classic case of attributing short term value to longer term harm.

Thirty years is a completely ridiculous, trivial, and irrelevant time period for analysis from which to make general economic pronouncements on principles such as the importance of exports.

As an investor, yes consumer spending is good for you. As a people, who have long term aspirations for maintaining a standard of living for themselves and their progeny, either your supposition is false, or if not, at least, unknown. But there is no LOGICAL reason that you are right that we know of. None.

Empiricism is not an excuse for ignoring history. Without sufficient history, empirical analysis yields results in which it is imposible to distinguish noise from signal.

The mercantilist regime in Red China is the biggest beneficiary of the U.S. unilateral Free Trade position. Communist party enterprise growth at every party level has benefited and private enterprise is now receding.

China has a trade deficit with Australia, but it pays for their commodities with U.S. dollars. China's foreign exchange reserves are now over three trillion dollars.

What is the current circumstance in the U.S.? Many pundits state that imports are basically free, based on thinking that brings to mind the wonders of Tinkerbelle.

Uemployment is one long-term consequence of prolonged trade deficits. Here is a quote from Cerdian-UCLA Pulse of Commerce Index posted 4-13 on Carpe Diem:

"The unemployment rate is likely to hold stubbornly to its current level but could be driven down by discouraged workers dropping out of the labor force.”

I am not knocking international trade, just the delusional arrangement that persists of one-sided Free Trade.

even unilateral free trade reduces it. you only import things that are cheaper. sure, that's a bummer if you work at ford and people import VW's, but but all the people who buy VW's save money. that savings is ALWAYS greater than the costs to ford.

thus, there is more money left here to spend on other things and create more jobs.

you are just mistaking how visible one job loss at ford is for the net effect. you don't see the 1.2 jobs created in other industries when the saved money is spent.

Anybody remember the post on here from a month or so ago regarding the small percentage of value that China adds to Apple products, but in the trade data China gets nearly all the credit for the final, re-import price?

I guess what I'm asking is, if the micro trade data isn't reflective, how could the macro data be useful?

if i sell china a $200 intel processor and make $80 profit on it and then a chinese company puts it onto a board and sells it on for $250 making $5 profit, they have more revenue than i do, but i have the much better business.

i certainly would not want to trade places with them.

of interest, if the instead sold it for $240 and lost $5 on every sale, they would still have more revenue but now would not even have a sustainable business.

this is why trade balance figures don't really mean very much in terms of economic health.

to go even a step further, imagine i sell the processor for $200 and make $80. china builds the board and sells it to me for $240, losing $5. i then put the board into a PC and sell it to an american for $500, making $100.

i have a trade deficit with china.

i also made $140 in profit.

china lost $5.

not only would you do this trade all day long and have a sustainable business, but your partner with the international trade surplus is going to go out of business.

2nd largest economy is determined by GDP. many chinese GSE's lose money.

forex reserves do NOTHING for the stability of chinese companies nor do they say anything at all about their profits or cash reserves.

in fact, you could argue that they are a sign of china's weakness. the chinese government is forced to accumulate vast piles of very low yielding paper, diverting capital away from productive uses at home, in order to hold down their currency to keep chinese companies competitive for export markets.